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Real estate invoice for corporations

do you own rental properties if so then you might have thought about holding these properties inside of a corporation in today's video I'm going to tell you why it might not necessarily be a good idea to do this and what you should be considering to do instead make sure you stay all the way till the end of this video if you want to learn about key tax mistakes that most Real Estate Investors make that are costing them hundreds of thousands of dollars let's dive in all right guys the first thing we want to talk about is triggering a taxable event there are a number of reasons why you should not put a rental property inside of a corporation such as an escort there are a number of key reasons why you should never put a rental property in an S corporation the first of these reasons is because if you decide you would like to remove the property from the escorp at some point in the future you're going to trigger a taxable event meaning that you're going to owe taxes now there could be a number of reasons why a person would want to remove their rental properties from their own Corporation for example he or she might want to remove the property for asset protection reasons estate planning refinancing maybe you have to refinance the property in the name of yourself maybe you were the person who originally bought the property and then you transfer the property into an escort and then you find out later that you have to refinance the property in your personal name but regardless of the reason why a person wants to remove the property from the escorp even if they just want to transfer the property to another entity that they own it will still be considered a taxable event the problem with making this maneuver is that it always leads to a tax bill for example let's say that you bought a rental property for $600,000 and that it appreciated to1 million if you sold that property at $1 million you would have to pay a capital gains tax on the $400,000 capital gains that you made having to pay a massive capital gains tax bill wouldn't be so bad if you were actually selling the property to a third party but if you were just moving assets around to restructure your portfolio then this is the last thing that you want to deal with AKA a gigantic tax bill when you haven't even truly sold the asset but unfortunately many rental property owners are unaware that removing their properties from their ESC Corps triggers a taxable event and thus they get stuck having to foot a large tax bill guys please do not let this happen to you one of the things that I also want to make sure that I mention is that when you decide to place your rental property inside of an escort there's no Step Up in basis another important reason why you should consider avoiding putting rental properties in your escorp is because ES Corporation assets do not receive a step up in basis upon the death of the owner if you're unfamiliar with the term Step Up in basis it is is when an asset is reassigned a value that is equal to the current fair market value of the asset if the owner dies so what that means is for example is if an owner has an asset that's a million dollars when they purchased it but when they die it's worth 2 million then the owner who is getting that asset transferred over will have that asset valued at $2 million and that is called the Step Up in basis the purpose of Step Up in basis is to prevent beneficiaries from having to pay capital gains taxes on all of the appreciated value of the asset during the lifetime of the former owner so if the former owner owned that asset at 1 million and then it appreciated to 2 million and then it was transferred to a beneficiary the beneficiary can sell that asset for 2 million without experiencing capital gains taxes hence the transfer of wealth the fact that rental properties in s corporations cannot get Step Up in basis when they're passed on after the owner dies it's probably one of the biggest downsides of putting these Assets in an S corporation so this is true if you plan on passing down these rental properties to your children or even other beneficiaries after you die such as grandchildren to understand how significant this is let's say that you bought a rental property in$ 1990 for $1 million and that property is now in 2023 worth $4 million at fair market value so you've experienced about $3 million in unrealized gains typically if you were to sell this asset you would experience capital gains taxes on that 3 million but if you have the Step Up in basis when your children or your beneficiaries receive this property valued at 4 million they can technically sell the property and experience $4 million completely tax-free if you didn't put your rental property in an S corporation and if this property could be stepped up in basis at the time of your debt death then your beneficiaries would not have to worry about paying taxes on that $3 million capital gain however if you held this property in an S corporation you would not get the Step Up in basis and thus your beneficiaries would have to pay capital gains taxes on the $3 million due within 6 months of your death so you can see how this is one of the ways in which the wealthy have built wealth over time they understand this information so if you do not want to saddle your beneficiaries with a massive capital gains tax bill then you should strongly consider not putting your rental properties inside of an S corporation now what are some of the other limitations that s corporations have in addition to triggering taxable events every time you remove a rental property from your escorp and not being able to take the advantage of the step up and basis there's also other limitations that the es Corp may have as it pertains to you being a real estate investor for example es Corps can only have one class of stock and a very limited number of shareholders in fact S corporation owners can only have 100 shareholders so if you want to try to divide up the ownership of this real estate asset or take on investors inside of this S corporation this ain't the vehicle for you es Corps are also very strict about who is allowed to be an owner only United States citizens resident aliens granters living trusts Estates or nonprofit entities are allowed to actually be S corporation owners corporations Partnerships business trust and IRAs cannot be S corporation owners so there's a significant limitation here many people people who want to share ownership of rental properties with various entities under their escort have difficulty doing this because of these restrictions so why do people put real estate n corporations in the first place like why do they even do this a lot of people put real properties in es Corps because they think that they will save a lot of money in taxes and that everything will be easier because es corporations don't have self-employment taxes easy peasy this does not make any sense because there's no self-employment tax on passive income it makes sense for some people when they're thinking about it but in the end it never typically makes tax sense es Corps are passed through entities this means that they're not taxed at the corporate level and instead the tax is passed through to the owners so in other words S corporation owners do not have to deal with double taxation like C corporation owners so essentially a lot of people think that they will save money in the corporate and self-employment taxes if they Place their rental real estate inside of an S corporation and that the advantages of doing this will outweigh any of the disadvantages of doing this but as you guys just saw this is not the case and I explained earlier in this video there's some significant downsides to using an esort for rental real estate so what should you do instead of using an ES Corporation we've talked about why it's not a good idea to put rental real estate and Es Corps so you might be wondering where should I be parking my real estate instead the real answer to this question is that each person's situation is unique and each person should speak with a tax expert before you make a decision on which business structure to use for your rental property business however with that being said there are some important advantages to using an LLC for your rental real estate business that you should be aware of for example with llc's you can transfer the property out of the LLC without realizing a campal gain and back into the LLC without realizing a capital gain it's not considered a taxable event for this reason llc's offer a much higher degree of flexibility compared to es Corps when it comes to rental real estate and like es Corps llc's have liability protection and do not have double taxation that c Corps have however unlike with es Corps rental properties inside of an LLC will get the Step Up in basis for shares owned by The Descendant this can help your beneficiaries potentially save tons of money in capital gains taxes and you can pass off your rental properties after you die without worrying about whether or not they're going to receive that step up in basis based on current tax law llc's also are generally just easier to set up than es Corps because there's just a little bit less reporting and for this reason many Real Estate Investors just prefer to have these LLC structures in place knowing that they can bring on outside investors another important advantage of llc's is that they can have more than 100 shareholders in fact llc's can have an unlimited amount of owners so if you want to have more than 100 shareholders for your real estate investing business then an LLC can be a much better choice for you in addition to all of these benefits that the LLC has s corporations have a little bit more maintenance es Corps must be managed by a board of directors and officers even if it's yourself you have to be your own board of director or your own officer and this makes the process of running them just a little bit more complicated than LLC llc's do not have to have a board of directors and in fact with the LLC the owners can manage the company themselves or just hire a manager to manage the business now I get asked this question should I have multiple llc's for my rental properties the great thing about llc's is that they separate your personal assets from your business assets so if you are sued and if your rental property is inside of an LLC then your personal assets would be protected depending on the state in which you set up the LLC in however if you own multiple rental properties and if you're keeping them all in one LLC then you could also be putting yourself at risk if you're ever Su for example let's say that you own three rental properties and that one of your tenants in property a is suing you due to a slip and fall incident instead of the income and assets associated with property a being at risk now the income and assets associated with property B and C are at risk as well well in the lawsuit however if you had separate llc's for each of these properties then only property a would be at risk if it's caught in a lawsuit right so yes creating multiple LLCs and putting one rental property in each LLC would be a good idea for many people the reason why most people don't do this is because of the cost associated with running multiple LLC is something you have to look at but it does make more sense have separate llc's for each property if your properties are lower in value then bundling two or three of them under the same LLC can be okay under certain circumstances after all if you have multiple llc's you'll have to pay multiple LLC fees and Associated other fees every year which can lead to a couple hundred bucks or a couple thousand bucks each year but if you want optimal security like Optimal security and protection from lawsuits creditors and if your properties are at least a couple hundred, in value each then I would go through the process of creating separate llc's this is usually the better option for protection the question I also get is do I have to file a tax return for my llc's if you have a single member LLC you'll report your income on form 1040 Schedule C or Schedule E if it's associated with your rental property if you have multiple member llc's then you'll be required to file a form 1065 to report your income and expenses inside of a separate entity and then you'll have a K1 form which passes through to your individual tax returns this form gets distributed after your 1065 tax return for your multi-member LLC is filed k1s have to be filed with the IRS as well so yes you will still have to file some tax forms for your LLC every single year with the IRS this might be a little bit of inconvenience to you but this is a part of the nature of running a rental property business correctly now because you have to file taxes for your LLC it is critical that you keep accurate records of all of your income and your expenses please make sure that you're documenting your income and expenses for your rental property business just like you would if you were running a McDonald's business we need to know the amount of income and the amount of expenses coming out of that business bank account if you do not want to do this yourself you can always hire a tax professional or an accountant to assist you with the process the more properties you have the more complicated your tax returns will be thus why it's beneficial to get a CPA or tax professional involved early on many people want to understand what's the difference between you know working with a tax professional working with a CPA I have CPAs in my office that are very good with the numbers that's what they're really strong at and then I have other enrolled agents and tax professionals who can assist you in leveraging the tax code AKA doing tax planning now are there any downsides to using an LLC for rental real estate this might be something that you may not have thought about as you can tell by now there are a lot of advantages for using rental real estate however yes there are a few downsides as well for using llc's for example if you decide that you would like to carry out other real estate activities such as flipping estate then you most likely have to pay expensive self-employment taxes that are at 15.3% luckily however rental real estate income is not subject to self-employment tax because it's considered passive income so you won't have to pay this the 15.3% on this amount of income that's flowing through your LLC this is very very important to understand if you're going into real estate investing you're going to be earning passive income which is not subject to social Social Security and Medicare taxes if you're going into real estate flipping wholesaling becoming a real estate agent or a broker that is active income subject to self-employment tax AKA while we look at s corporations if the government required Real Estate Investors to pay self-employment taxes for rental income then profit margins would be far less and you would see far less real estate investing so it is a great news that the government does not require self-employment tax for rental income and in fact this is one of the main tax advantages that draws many people to rental real estate for business purposes getting financing for rental properties is the tricky part which is what prevents many people from going down the road of investing in real estate saving up money to get into an investment property having good credit qualifying for a loan affecting your debt to income ratio that's the tricky part but if you can solve that part and work with a really good lender that helps you leverage your business or helps you leverage your ordinary income to qualify for a loan you can set yourself up to invest in real estate and run a real estate operation that can eventually outweigh your ordinary income and that's what I seek for everybody now choosing between an LLC and an S corporation is something that you have to understand as I mentioned earlier the exact right answer to this question will depend on what type of business that you're trying to run I strongly recommend that you speak to a tax professional before making any decisions however with that being said for most Real Estate Investors llc's are going to be the better option for most real estate Developers flippers Brokers wholesalers and S corporation is going to be the better option llc's provide so many benefits for Real Estate owners that they're even commonly used by Advanced and famous Real Estate Investors such as Donald Trump um such as Jeff Bezos and many others if you have an LLC for your rental real estate you will be able to use Step Up in basis and you won't create a taxable event even if your properties are moved out of the llc's and into new llc's you can do this all of these advantages are compelling and they demonstrate why many Real Estate Investors just choose to go with llc's as opposed to S corporations however if you plan to use your real estate business to primarily flip properties then we might want to look at the S corporation because ESC Corps do minimize your self-employment tax burdens so if a large portion of your real estate business will include active income with flipping or other related activities as opposed to passive rental income then an S corporation could be the better option for you what if you already have an S corporation what should you do now if you're already in scorp and you already have properties in the escorp then you can still keep your escorp and enjoy pass through taxation and liability protection however you need to be careful about taking properties out of the escort because you will trigger a taxable event when you do this you need to make sure that you speak with the tax professional to discuss what your options are you might be better off waiting until you're actually ready to sell a property to ever remove it from the S corporation if you do decide that you would like to invest in more rental properties you should probably look at setting up a brand new LLC to do this after all just because you have an es Corp doesn't mean that you can't set up a new LLC for new properties in order to take advantage of all the benefits that llc's have to offer for real estate investing having one or multiple llc's for your properties can give you much greater level of flexibility for your real estate investing business and it can create additional tax deductions because you have multiple different entities here's what I want you to walk away from with this video number one both s corporations and llc's allow for liability protection and pass through taxation so you can avoid double taxation with each one of these entity structures and you're reducing your vulnerability from LW number two llc's are probably the better option for most Real Estate Investors because they provide the stepup invas for properties and llc's can help you avoid certain capital gains taxes because they are generally easier to manage and number three if you already have an S corporation Don't Panic there's still good business structures and they are still useful for Real Estate Investors however if you want to adjust your strategy and perhaps start using a different business structure then it would be wise to schedule a complimentary consultation with my tax team you need help figuring out which is better for your real estate investing situation and LLC and S corporation then feel free to get in touch with my company today we can help you create a custom a tax strategy for your real estate investing business that allows for you to minimize your tax obligations while maximizing your tax savings you can schedule a complimentary consultation with my team by clicking on the link in the description below this video you can also find a link to my course tax Al me in the description below this course will teach you strategy used by the wealthy to save money on taxes every single year we go over real estate investing not only for short-term rentals but also for long-term rentals so feel free to sign up for that as well okay that's it for this video guys I hope that you enjoyed it and I look forward to seeing you in the next one cheers [Music]